Waiting, and Discounting

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The resurgence of initial public offerings is on hold, again. And the issues that do launch aren't setting the market on fire.

In 11 of the 19 IPOs that have come to market this year, underwriters have had to discount the offering price to stoke investor interest. Moreover, the average first-day "pop" in price is almost flat — 2% — compared with a 4% uptick in the second half of 2009 and a 12% average from 2005 to 2008, according to data from Renaissance Capital's IPOHome.com.

The below-range pricing seen so far this year is a sign that investors "smell blood in the water," says Jay Duke, a partner in the capital-markets practice at BDO, in that companies going public now are perceived to be in desperate need of the money.

The paucity of new offerings allows investors to scrutinize each one more carefully, notes Kal Goldberg, a managing director at FD, a communications firm. While business models and solid stories still matter, more than ever companies have to demonstrate good corporate governance, stable cash flows, a favorable earnings outlook, proven management teams, and a solid asset base, says Goldberg.

Companies going public in 2010 "must pay particular attention to their abilities to meet short-term market expectations," says a recent study by PricewaterhouseCoopers. Many private companies mistakenly assume that IPO "goodwill" can be stretched out over several quarters.

The best move for would-be issuers may be to wait until pricing becomes more attractive, or to seek capital elsewhere. Postponing an IPO may pique equity holders and employees, but it is often the wisest choice. "A postponement isn't indicative of a bad company," Duke says. "It just signals that the company has options."